The future of bank branches is a topic sparking much debate among banking professionals. But most of the industry analysts tend to focus on changes in consumer behavior and the shift toward digital channels. There is, however, an even bigger challenge facing the industry: the sheer number of branches that are too small to be profitable.

Many simply aren’t growing at a sufficient rate, and will never reach profitability.

According to Peak Performance data, just slightly more than half (52%) of all branches in the banking industry are achieving acceptable levels of profitability. Over one quarter (28%) are below breakeven, and most of the remainder are at least contributing to overhead even if they are not achieving acceptable ROI.

That might be tolerable if unprofitable branches were growing at a sufficient rate to become profitable down the road, but they aren’t. Half of the branches that are unprofitable today will never cross the break-even threshold; they will forever be a drain on resources.

A number of large banks — Citizens, PNC, Chase and others, all with expansive traditional branch networks — are unveiling digital initiatives to reach new customers.

These launches come at a time when interest rate increases have made deposits increasingly competitive. The efforts also follow in the footsteps of other companies that have offered digital banks for years — potentially forcing these incumbents to play defense.

The digital banks also allow banks to solicit deposits from outside their footprint and engage new customers with a full-service relationship without a branch, said David Kerstein, president of Peak Performance Consulting Group.

But Kerstein said consumers who open an account online may eventually want to visit a physical bank branch. A digital bank could inform a company where to expand with physical locations and help optimize its footprint, he said. Branches may figure into PNC’s nascent digital banking strategy as the company looks to expand westward into select cities.

This article, by Peak Performance President David Kerstein and Director Tom Zayko, was originally published in BAI Banking Strategies.

As retail bankers, we spend significant amounts of time, capital and energy focused on maximizing the performance of our distribution network—online, mobile, call centers and branches—so we can fulfill an important goal: to deliver an exceptional, seamless customer experience that builds stronger relationships and growth.

While each channel presents opportunities for improvement, the branch network stands out. It remains the primary sales channel for consumers and small businesses, and consumes

significant resources in real estate, staffing and operational expense. Use of digital channels may be growing, but the branch system maintains the greatest potential to immediately improve sales and efficiency.

Which leads us to ask: “Do you really know what goes on in your branches every day?” Based on our experience with thousands of branches, and with detailed tracking of every transaction and activity, we think not.

So where to start? We think a granular view of activities and time spent is in order. There are two ways to do this, and some surprising insights you might gain.

Banks and credit unions are opening fewer new branches, so they have to be more selective. That means picking the right sites in the right markets.

Over the course of my career, I’ve helped select sites for over 1,000 new branches. In my role as a consultant, I’ve found that many C-level executives at community banks and credit unions aren’t familiar with some of the most fundamental principles that (should) drive a branch distribution strategy.

When crafting a long-term distribution strategy for a retail financial institution, there are three basic elements that should determine which sites are appropriate for new branches: markets, locations, and sites.

The right market

The right location/neighborhood within the market

The right site within the neighborhood

How much of a difference does it make to get the right alignment? It can be as much as 50% impact on sales and branch size.

Take the time to get it right. You are making a long term investment and when all three things align, success will follow.

Technology is redefining financial services delivery, customer experience and money movement. But with so much change, it’s a confusing world. Bank and credit union leaders now ask themselves: “Where should we focus? Should we expand our technology partners beyond our core providers? And how can we predict which investments are most likely to drive profitability?”

The confusion is understandable. Technology adoption is moving faster than ever before. Look at the historic trendlines: It took about 25 years for color TV to reach 90 percent penetration of U.S. households; microwaves took only about 20 years; cellphones about 15; and the internet even less. Furthermore, the explosion of new fintechs—each with a hot new approach—makes us wonder: Do I need to ride this wave? Or risk being left behind?

How can you make sense of it all? Here are our ten building blocks for your digital strategy.